A loss-making year feels like bad news twice over — once when it happens, and again when the instinct is to shrug, carry the loss forward, and hope next year is better. For most sole traders that instinct is expensive. A trading loss is not dead money sitting in a drawer; it is a claim you can often turn into cash within weeks, either by reducing this year's tax bill or by reclaiming tax you already paid in an earlier year.

Which route wins depends on your circumstances, and the rules changed meaningfully in April 2024 for anyone using the cash basis — which, since the reforms, is most sole traders by default.

The four routes, in plain terms

  • Sideways relief (current or previous year). Set the loss against your other taxable income — employment income, a previous job's salary, savings interest — for the same tax year or the one before it. This is the fastest route to cash if you have other income to set it against.
  • Carry forward. Save the loss to set against future profits of the same trade, with no cap and no time limit. This is what happens automatically if you do nothing, and it is the right answer if there is no other income to relieve it against.
  • Opening years relief. A special extension available only in the first four tax years of a new trade: the loss can be carried back three years, against total income in the earliest of those years first, rather than just the one before.
  • Terminal loss relief. On permanently ceasing to trade, a loss in the final twelve months can be carried back against profits of the same trade in the previous three years.

Sideways relief, opening years relief and terminal loss relief can each generate an actual refund or a reduced tax bill now. Carry-forward cannot — it only ever offsets tax on future profits, which is worth nothing until those profits exist.

The cap that limits how much you can offset

Sideways relief and opening years relief against your general income are capped at the greater of £50,000 or 25% of your adjusted total income for the year the relief is claimed against. Most sole trader losses are nowhere near that limit, but a large one-off loss set against a good year's employment income is exactly the situation where it bites — check it before assuming the whole loss is relievable in one go. There is no such cap on carry-forward against future profits of the same trade.

The 2024 change that opened these reliefs up

Before 6 April 2024, a loss calculated under the cash basis — the simpler method most small sole traders use, recording money in and out rather than full accruals accounting — could only be carried forward. Sideways relief, carry-back and opening years relief were all off the table unless you kept accruals accounts instead, which most small traders do not.

That restriction was removed for losses arising in the 2024/25 tax year onwards. A cash-basis loss now has access to exactly the same reliefs as an accruals-basis one — sideways, carry-back, opening years and terminal relief, on identical terms. Since the cash basis also became the default reporting method for most sole traders from 2024/25, this single change is the reason a lot of loss-relief advice written before 2024 is now simply wrong for cash-basis traders, and worth re-checking if that is where your understanding came from.

Worked example: turning a £14,000 loss into a £2,800 refund

The figures below are illustrative. A landscaper is in the second tax year of a new business, having spent heavily on machinery and taken time to build a client list. The year produces a trading loss of £14,000. In the tax year immediately before starting the business, he was in full-time employment earning £32,000, on which PAYE deducted income tax as normal.

Three ways to use a £14,000 trading loss compared: carry forward gives no cash now, opening years relief carried back three years refunds £2,800 A £14,000 loss, three ways Illustrative figures, second tax year of trading. Carry forward only £0 cash now — waits for future profits Sideways, this tax year Limited — little other income to set it against yet Opening years, carried back 3 years £2,800 refund £32,000 employment income − £14,000 loss = £18,000 taxable, instead of £19,430 taxed at 20%. Tax paid was £3,886; tax now due £1,086 — the £2,800 difference is refunded.

Because he is within his first four tax years of trading, opening years relief lets him carry the whole loss back to that earlier employed year rather than just the year immediately before. That year's taxable income was £32,000 − £12,570 personal allowance = £19,430, taxed at 20% = £3,886 already paid through PAYE. Carrying back the £14,000 loss reduces taxable income to £5,430, on which tax due is £1,086. HMRC refunds the difference: £2,800, landing within weeks of the claim rather than sitting as an abstract carry-forward against profits that may or may not arrive next year.

Carry-forward was always available and would have cost nothing to claim instead — but it is worth precisely nothing until the business turns a profit to set it against, which for a business that just had a £14,000 loss year is not guaranteed to be soon.

How and when to claim

Most loss relief claims are made through the Self Assessment tax return for the year of the loss, in the self-employment pages, by specifying which relief you want and against which year. The general time limit is one year from the normal 31 January filing deadline for the tax year of the loss — so a loss arising in 2026/27 must generally be claimed by 31 January 2029. Carry-forward does not need an active claim in the same way; it simply sits against the trade until profits arrive, though it still needs to be recorded correctly on the return for the loss year so HMRC's record matches yours.

What to do this week

  1. If this tax year (or last year) produced a loss, work out which of the four routes actually puts cash in your hands fastest, rather than defaulting to carry-forward because it is the one that needs no decision.
  2. Check how many tax years you have been trading. Inside the first four, opening years relief is usually the strongest option if you had taxed income in an earlier year — most people trading for the first time have never heard of it.
  3. List every source of other income for this year and the previous year — employment, a partner's PAYE job you are not entitled to use, savings interest, another trade — so you know what a sideways or carry-back claim would actually be set against.
  4. Check the £50,000 / 25% cap only applies if the loss is large relative to your income in the relief year — for most sole trader losses it is not the binding constraint, but confirm rather than assume.
  5. If you are on the cash basis and were told before 2024 that your options were limited to carry-forward, revisit that advice — it has not been correct since the 2024/25 tax year.
  6. Diarise the claim deadline: one year from the following 31 January for the tax year the loss arose in.

None of this is a reason to look for losses or to under-declare a good year. It is a reason not to leave cash on the table in a genuinely bad one. Our sole trader tax guide covers how income tax and National Insurance interact more broadly, and if the loss followed a slow first year, our piece on registering as a sole trader covers the basics worth getting right from the start.

Where we help

We work out which relief actually gets you money back fastest, check the cap before assuming the whole loss is usable in one year, and make sure the claim goes in on the return rather than the loss quietly defaulting to carry-forward because no one asked the question. Fixed fees from £19 + VAT a month. Get started.